The Horrors of Defaulting on Education Debt

Harold received $7,500 in student loans in 1985. He now owes about $25,000. Six years ago he became disabled with severe arthritis and qualified for Social Security Disability. However, the U.S. Department of Education has a garnishment order for 15% of his Social Security benefits because the requirements for a Total and Permanent Disability discharge are much harsher than the requirements for Social Security Disability. He depends on the Social Security disability benefits to pay the rent and to buy food and medicine.

Harold has received relentless phone calls and mail from a half dozen collection agencies, sometimes getting dozens of calls a day. They have even harassed his mother, his sister and his doctor. (You can usually stop most of the phone calls and letters by telling the collection agency in writing to stop contacting you. This does not cancel your obligation to repay the debt and the lender can still garnishee your wages or take other steps to collect the debt, but it does eliminate most of the harassment. See the Fair Debt Collection Practices Act Fact Sheet on the Federal Trade Commission’s web site for more information.)

Inability to Renew a Professional License

Joe graduated in 1989 with a chiropractic degree and $80,000 in student loan debt. For the first four years after graduation, however, he earned less than $1,000 a month and was unable to repay his debts. After he exhausted his deferments, his loans went into default. When his income increased he asked the lender if he could start making payments on the loans, but he was told that his only option was to pay back the amount owed in full. By the time he was eventually offered consolidation and rehabilitation as an option, the debt had grown enough that the monthly loan payments were unaffordable. Nobody has ever mentioned the availability of income-contingent repayment to him. He is ineligible for income-based repayment because he has yet to file his most recent federal income tax returns.

His license renewal was denied in 2000, preventing him from working as a licensed chiropractor. This means he will never be able to repay even a fraction of what he owes. The inability to renew a professional license is one of the most counterproductive consequences of defaulting on federal student loans. According to the collection agency he now owes a total of $365,000. (Such extreme growth in the amount owed usually requires an extended period of nonpayment in combination with late fees and collection charges. Collection charges are currently deducted from payments on federal loans but may be added to the loan balance on private student loans. Consolidation of a defaulted federal loan causes the collection charges to be added to the loan balance.)

No Reasonable Options

Judy borrowed $30,000 to pay for her education and now owes almost $70,000. She lives frugally and works 60 hours a week at 3 low-paying jobs, yet the options offered to her by the collection agency ($600 a month for 10 years or $350 a month for 20 years) are unaffordable. She doesn’t have enough money to repair her car so that it will pass inspection. She hasn’t been able to buy new clothes for a decade.

Judy’s got so few options that she’s drafted mock suicide notes as a form of dark humor: “Hey mom & dad, I really love you, but life on this planet is so miserable as a slave to debt that I can no longer enjoy my time here. Every day is filled with hardship and misery and self-loathing. Therefore, I am choosing to leave this world. Thanks for trying, sorry I let you down.” (Don’t worry, she’s joking. But it illustrates how oppressed many borrowers feel by their debt. They have no exit. Student loans effectively cannot be discharged in bankruptcy except for the most dire of circumstances. Even then the undue hardship test is applied in an arbitrary and capricious manner, and most borrowers who deserve a discharge do not get one. Most bankruptcy attorneys will no longer file an undue hardship petition because the chances of success are so slim.)